Sunrun has maintained growth and cash flow amid industry turbulence. And it’s done so while building out infrastructure to add future revenue streams to its rooftop solar business: energy storage and grid services.
In 2018, the rate of solar customers opting to add home batteries via Sunrun’s BrightBox package reached 20 percent in California. The company has expanded its offering to Hawaii, Arizona, Nevada, New York and, last week, to Massachusetts.
The firming ability of storage turns the company’s portfolio of rooftop solar installations into a far more valuable asset, and Sunrun is working to monetize that by bidding on grid services contracts with utilities; it has won a few already, and will hear back on more procurements throughout the year. This won’t bring in revenue immediately, but will over the coming years, as the contracts enter into force.
Unlike some top-five residential installers, Sunrun might be around long enough to see those plans to fruition.
The quarterly earnings report released last week revealed a cash-flow-positive business with expectations of steady growth through the coming year. In 2017, Sunrun increased its deployments 15 percent year-over-year, from 282 megawatts to 323 megawatts.
Company executives expect to deliver another 15 percent deployment increase in 2018, and to grow cash generation even faster than that.
Total revenue grew by 17 percent or $75.8 million, yielding net income available to common stockholders of $124.5 million. That amounts to $1.15 per share in diluted net earnings available to common shareholders.
Sunrun’s stock price has rebounded from a four-month stretch at or below $6. In early February, it bumped up above $7, and has been hovering around there since.
Weathering the storm
Both solar tariffs and tax reform brought downsides for the residential solar industry in recent months.
The White House’s 30 percent tariff on imported solar modules will bring less disruption for the residential sector compared to tight-margin utility-scale projects, but it is still material.
The tax reform passed in December provided Sunrun a one-time benefit of $33 million, more fortuitous than the situation that befell developer First Solar, which had to pay upward of $400 million as a result. In the long term, the corporate tax cuts reduce the amount of available tax equity searching for a home in solar assets.
Each of those stresses will, in theory, reduce project value by about $0.10/watt. Compare that to Sunrun’s record $1.22/watt unlevered net present value (project value minus creation costs) in the fourth quarter of 2017. All else held equal, tariffs and tax reform will send project value back to where it was a year ago.
Sunrun won’t hold all else equal, however; it will continue chasing cost reductions and cheaper sources of capital. In the end, the leadership expects net present value to stay above $1.00/watt in 2018.
Without federal interference in the competitive landscape, Sunrun could have posted even better unit economics. Instead, it must work to keep things steady in the face of external negative forces.
Looking ahead, Sunrun will face a different kind of headwind: actual competition from Tesla and Vivint.
The second- and third-largest installers shrank their deployments in recent quarters as they sought to improve profitability.
“It was a somewhat easier time for Sunrun to have a breakout year, given that Tesla and Vivint were struggling and there was market share to take,” said Allison Mond, solar analyst at GTM Research. “Both Tesla and Vivint are projecting a return to growth this year, though, which I believe will make it that much harder for Sunrun to continue to grow 15 percent again.”
Weathering actual storms…with batteries
Residential solar competition may heat back up, but Sunrun is striving to move beyond that particular market.
Solar-plus-storage has quickly moved from a minor add-on to a significant portion of the overall business. The rate of solar customers adopting storage in California has roughly doubled each quarter for the last three quarters.
For Sunrun, BrightBox amounts to a more valuable, higher-margin product than standalone solar. But it also creates the opportunity to work with utilities on grid service contracts.
“Overall, if I look five years into the future, it wouldn’t surprise me if 80 percent of solar systems had battery storage,” Executive Chairman Ed Fenster said in an interview. “Change is going to happen much faster than people think, and the speed of battery deployments is going to surprise people.”
The rash of major storms and outages over the last year have only accentuated the customer benefit of clean backup power, he added.
“There are millions of people without power as we speak in the Northeast,” he said.
The recent nor'easter demonstrates the value proposition of BrightBox in Massachusetts. Sunrun has highlighted the resilience value, contrasting the battery system to “dirty, noisy diesel generators” that otherwise serve as backup.
That framing may be necessary to justify the $1,000 upfront cost that Sunrun is charging in Massachusetts, unlike in its other markets. The argument is that it's cheaper than a diesel genset, and then the customer gets electricity for three-quarters of the retail price. Still, the upfront charge changes the payback calculus compared to markets like California and Hawaii, where pro-storage policies offer more favorable economics.
The launch itself caps Sunrun’s efforts to work with regulators and policymakers to clear up permitting and interconnection rules so that the company feels confident entering the state.
The company also plans to wade into the state’s ongoing debate over how to procure clean energy, which is required by recent legislation.
The state’s choice of a massive, centralized transmission line from Quebec stalled when a New Hampshire regulator denied a crucial construction permit. Fenster positioned BrightBox as a localized antidote to permitting risk and transmission constraints associated with mass-scale projects.
“We can just build it and it’s going to be lower cost,” he said. “What customers want is reliable, affordable power, and we really believe distributed power is going to provide that better than centralized power. We’re pleased to be leading the effort there.”
Grid services revenue expected
In the call with investors, CEO Lynn Jurich teased that the move into grid services will eventually produce a “customer-created utility” that could tap into the $500 billion market cap of the 20 biggest utilities.
Grid services isn’t expected to add substantial revenue this year, though; instead, Sunrun is bidding on a large number of RFPs for grid services, Fenster said.
“We will start adding contracted revenue in the near term,” he noted.
The company got an early win for aggregated capacity in California's Demand Response Auction Mechanism last summer, as did Tesla.
Utilities typically award grid services contracts several years ahead of when the power is needed, so winning a bid won’t mean cash starts flowing immediately. However, if Sunrun locks down more contracts this year, it can count on years of contracted revenue streams in the future.
Having maintained steady growth through a period of industry upheavals, Sunrun has an opportunity to seize the first-mover advantage in pursuing grid services in earnest.
“While Tesla and Vivint still need to work on figuring out the kinks in their solar businesses, Sunrun is able to focus its efforts on further strategic initiatives,” Mond said.
Looking to figure out where residential solar is headed next? You need to come to GTM's Solar Summit. We'll have many of the top executives in the industry there to provide insight on the evolution of the market.
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